The Civil Engineering Contractor June 2018 | Page 28

INSIGHT
Building Africa
The Civil Engineering Contractor shares insight from the industry around the challenges
faced by infrastructure funding within South Africa and sub-Saharan Africa.
R
ichard Roothman is the head
of the Banking and Finance
practice group at Werksmans
Attorneys, specialising in project and
limited-recourse finance transactions,
debt capital market and structured
finance transactions, and syndicated and
bilateral funding transactions.
He shares his views on the challenges
of infra funding.
The decline in direct foreign
investment into South Africa over the
past few years can be attributed to
low business confidence as well as
regulatory and political uncertainty.
One initiative that can drive renewed
direct capital investments, a decrease
in unemployment, and economic
growth, is the launching of new
infrastructure projects by national
and provincial government and by
municipalities, as emphasised by
President Cyril Ramaphosa on 16
April 2018.
Historically, government has used
government funding in the form
of taxes to finance government
infrastructure projects, and state-
owned entities (SOEs) have used cash
collected from users and consumers to
finance their projects.
Funding challenges
However, as a result of the budget
deficit — which may exist for a
number of years to come — and
the dire financial situation in which
26 - CEC June 2018
SOEs find themselves, government
and SOEs will have to rely more on
private funding by banks, financial
institutions, and foreign development
investments (FDIs). Further borrowing
by government and those entities
may, however, cause further strain
on government’s budget and that of
SOEs. Because of ‘state capture’, the
increase in corruption and fraud in
several SOEs, as well as political risk,
local and foreign funders may seek
government guarantees to mitigate
risk.
Another factor that may deter funders,
especially foreign funders and FDIs,
from financing local infrastructure
projects, is the credit rating assigned
by rating agencies to government and
SOEs. Recently, the credit ratings of
government and SOEs such as ESKOM
have been downgraded. If those credit
ratings are further downgraded,
foreign investors, funders, and local
banks may not be all that eager to fund
local infrastructure projects without
a government guarantee. Further, the
lower the credit rating, the higher the
funding costs may be to mitigate risk.
Cost overruns could also play
a role in funding government and
provincial infrastructure projects. This
could result from political factors,
changes in the scope of the project,
and contractual issues. Almost all
government infrastructure projects
in the past five to eight years have
experienced cost overruns. Such
projects include the soccer stadia for
the 2010 World Cup and the Medupi
Power Station. Cost overruns put
further strain on government funding
as it will have to cover those cost
overruns from sources it has not
budgeted for. Private funders would
become reluctant to fund such major
infrastructure projects in the absence
of sufficient risk mitigation. Cost
overrun risk could be mitigated by
government guarantees, contractual
provisions that could impose a limit
on cost overruns, and fixed price
contracts, where cost overrun risk lies
with the contractor.
Are PPPs the solution?
A PPP can be described as a contract
between a public sector institution/
municipality and a private party,
in which the private party assumes
substantial financial, technical,
and operational risk in the design,
financing, building, and operation of a
project. PPPs have been used to build,
operate, and maintain government
buildings and accommodation as
well as for government’s Renewable
Energy Independent Power Purchaser
Procurement programme (REIPPP).
Under PPPs, the private party is
required to raise long-term funding
in the form of equity and debt. An
important factor for the private sector
to participate in a PPP is the revenue